Obtain an articles of organization form. Articles of organization represent the document used to legally create a limited liability company, according to FindLaw.
The form is available from the secretary of state's office in the jurisdiction where you want to establish an LLC. The form is available online through the secretary of state's website as well as from the agency's brick and mortar world office. Complete the articles of organization form, following the instructions provided with the document.
Make certain you fill in all required spaces. Include the nature of the business undertaken by the LLC. You can use a phrase along the lines of "to engage in any lawful activity permitted of a limited liability company. Identify the registered agent for the LLC. The registered agent is the individual or firm--a law firm, for example--designated to accept a summons and petition on behalf of the LLC if it is sued. Where does it need to organize and, if necessary, qualify to do business? Of course, you may use servers located somewhere else, but the location where you and your employees do business related to the website maintaining the site, taking and fulfilling orders, answering customer email most likely represents your primary physical place of business.
Most small business owners reasonably decide to form their LLC in the state where their primary place of business is located. But what about other states?
Do you have to qualify your LLC to do business in other states? If you want to learn more about the issues surrounding operating an Internet business, see LLC or Corporation? Anyone considering an LLC will want to compare this business form to the three traditional ways of doing business:. This section provides general information on the characteristics of each type of legal entity, focusing on the main reasons why business-people adopt one form over another. Furthermore, coming to terms with pass-through taxation is challenging, even for tax specialists.
You may need to check with a tax adviser to make sure the LLC makes sense to you from a tax standpoint, and to learn about any of the special tax areas some of which are covered in Chapter 3 that may have special relevance to your business. For a quick overview of the different legal and tax characteristics of the various entities, see the business entity comparison chart, at the end of this chapter. TIP Tax update. Limitations and exceptions apply.
When To Form An LLC (Limited Liability Company)
See Chapter 3, and ask your tax adviser for more information. The simplest way of being in business for yourself is as a sole proprietor. This is just a fancy way of saying that you are the owner of a one-person business. As a practical matter, most one-person businesses start out as sole proprietorships just to keep things simple. For further examination of the legal and tax characteristics of the various ways of doing business, see the following Nolo titles:. Once you decide to own and split profits with another person other than your spouse , by definition, you have at least a partnership on your hands.
Gain limited liability protection for yourself, and added credibility for your business.
Unfortunately, although a sole proprietorship is simple, it can also be a risky way to operate, especially if the work you do might result in large debts or liabilities from lawsuits. The sole proprietor is personally liable for all debts and claims against a business. Because the owner is self-employed, he or she must pay an increased amount of self-employment FICA tax based upon these profits—about twice as much as an incorporated business or corporate employee would personally pay. The LLC requires more paperwork to get started and is more complicated than a sole proprietorship from a legal and tax perspective.
Although LLC owners, like sole proprietors, report business profits on their individual tax returns, a co-owned LLC itself is treated as a partnership and must prepare its own annual informational tax return. The payoff for the LLC of this added complexity is that owners are not personally liable for business claims or debts unless personally guaranteed, as with a personally guaranteed bank loan. A partnership is a business in which two or more owners agree to share profits. A general partnership can be started with a handshake a simple verbal agreement or understanding or a formal partnership agreement.
These provisions usually say that profits and losses of the business should be split up equally among the partners, regardless of the amount of capital contributed to the business by each partner. Rather than relying on state laws, general partners should prepare an agreement that covers issues such as the division of profits and losses, the payment of salaries and draws to partners, and the procedure for selling partnership interests back to the partnership or to outsiders. General partnerships may be formed by two or more people; there is no such thing as a one-person partnership.
Legally, there is no upper limit on the number of partners who may be admitted into a partnership, but general partnerships with many owners may have problems reaching a consensus on business decisions and may be subject to divisive disputes between contending management factions.
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Each owner of a general partnership is individually liable for the debts and claims of the business. In addition, each partner may bind the partnership to contracts or enter a business deal that binds the partnership, as long as the contract or deal is within the scope of business undertaken by the partnership. The personal liability for partnership debts, coupled with the agency authority of each partner, makes the general partnership riskier than limited liability businesses corporations, LLCs, and limited partnerships.
A general partnership is not a separate taxable entity. Profits and losses pass through the business to the partners, who pay taxes on profits at their individual tax rates.
Although the partnership does not pay its own taxes, it must file an information return each year—IRS Form , U. Return of Partnership Income. General partnerships are less costly to start than LLCs because most states do not require a state filing and fees to form them. The major downside to running a general partnership over an LLC is the exposure to personal liability by each of the general partners.
LLC owners, on the other hand, avoid this personal liability problem altogether. To establish a C corporation, you prepare and file formal articles of incorporation papers with a state agency usually the secretary of state and pay corporate filing fees and initial taxes.
LLC vs. Inc. - Differences & Benefits | BizFilings
A corporation assumes an independent legal and tax life separate from its owners, with the result that it pays taxes at its own corporate tax rate and files its own income tax returns each year IRS Form Corporations are owned by shareholders and managed by a board of directors. Corporate officers are normally appointed by the board of directors to handle the day-to-day supervision of corporate business, and usually consist of a corporate president, vice president, secretary, and treasurer. TIP A C corporation is nothing more than a regular corporation. In most states, one or more persons can form and operate a corporation.
Limited Liability Company (LLC)
In a few states, the number of directors necessary for a multi-owner corporation is related to the number of shareholders. For example, in these states, if there are two shareholders, two or more directors must be named; if three shareholders, then three or more directors are necessary.
As we have mentioned, a corporation provides all its owners shareholders with the benefits of limited liability—before other limited liability entities such as the LLC were available, that was a major reason many businesses organized as corporations. The corporation has a legal and tax existence separate from its owners. This leads to the following corporate characteristics:. If this happens, the business owners shareholders can be held personally liable for any money awarded by a court against the corporation.
Corporations are similar to LLCs in the types of paperwork and fees necessary to get them started with the state. Both must prepare and file organizational papers with the secretary of state and pay filing fees. Both should adopt a set of operating rules that sets out the basic requirements for operating the business—corporations adopt bylaws; LLCs adopt operating agreements.
What sets the corporate form apart from LLCs is how they are taxed. This can result in tax savings if money is left in a business for expansion or for other business needs. For small, actively run corporations, we say no. To avoid the penalty of double taxation, smaller corporations rarely pay dividends to the owners.
Instead, the owner-employees are paid salaries and fringe benefits that are tax deductible to the corporation. As a result, only employee-shareholders pay income taxes on this business income. So cast a critical eye on any article decrying the double taxation of corporate profits for small businesses.
Unless you are forming a corporation with passive investors who expect to receive regular dividends as a return on their investment in your corporation, double taxation will generally not be a big deal. Exception: When and if appreciated assets of a corporation are sold, both the corporation and its owners may have to pay income taxes on profits from the sale. If the owners incorporate, or if they form an LLC and elect corporate tax treatment, they can keep money in their business, which is taxed at lower initial-bracket corporate tax rates, saving overall tax dollars on business income.
This corporate tax distinction can be eliminated if the LLC members wish. Even though an LLC may now elect corporate tax treatment, there may be other reasons to favor the corporate form over the LLC, such as the availability of corporate equity sharing plans.
Also, a number of people—perhaps including persons you may wish to do business with—associate the corporate form with an added degree of formality and solidity. And, of course, the ability to go public make a public offering of corporate shares is a traditional feature of the corporate form that more successful small businesses may be able to capitalize on. In our opinion, you should forget about going public with an LLC; the practical and tax restrictions on transferring membership interests rule out this possibility.
There are several downsides to corporate life. A limited partnership is similar to a general partnership discussed above , except that instead of being composed of general partners only, it has two types:.